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Quest Expects Lab Industry Consolidation to Pick Up Post-Pandemic

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NEW YORK ─ The COVID-19 crisis has slowed Quest Diagnostics' lab acquisition efforts, but the firm believes that industry consolidation will continue apace once the pandemic is over.

Various factors could counter the company's consolidation opportunities, including the revenues labs have garnered from COVID-19 testing, the significant expansion of molecular testing at many hospital labs over the course of the last year, and the pause in cuts under the Protecting Access to Medicare Act (PAMA).

During Quest's recent Q4 2020 earnings call, Quest Chairman, President, and CEO Steve Rusckowski said that he believed broader trends toward tighter insurance contracts and networks would continue to provide the company with lab acquisition targets.

"There has been a short-term opportunity for a number of labs to take advantage of the opportunity to provide COVID-19 testing," Rusckowski said. "But as that starts to change throughout 2021, we believe that the realities of what the world will be, with tighter [payor] networks and more consolidation, will play nicely into our strategy and allow us to acquire more going forward.

Quest CFO Mark Guinan said during the call that in its discussions with potential acquisition targets, none are expecting their valuations to reflect the increased business from COVID-19 testing during the pandemic.

"I don't see a mentality of, hey, my value has gone up dramatically because of COVID testing," he said. "The people we are talking to right now recognize that that is short term, and that is not part of the valuation discussion."

The addition of molecular testing capabilities by many labs during the pandemic will leave them with new molecular capacity that they may put toward other kinds of testing after the COVID-19 threat has receded. Rusckowski said, though, that he didn't expect this to cut into Quest's molecular business.

"For other commercial laboratories and hospitals to use that capacity to compete with us in, by way of example, women's health, that is a long stretch," he said. "There's a lot more to getting a client to flip over than lab capacity. You have to have a sales force, you have to have logistic capabilities, you have to have electronic interfaces, you have to work with physicians, contract with the health plans."

The pandemic has also delayed reporting requirements and rate cuts under PAMA, which has been seen as one of the main drivers of lab industry consolidation. Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law in March 2020, the rate reporting was pushed to between January 1, 2022 and March 31, 2022 and the next round of rate cuts was pushed from 2021 to 2022, with tests receiving cuts of up of 15 percent a year from 2022 through 2024.

Guinan said, though, that Quest did not believe this temporary reprieve would alter the acquisition landscape long term.

He added that in addition to government payors, commercial insurers were putting downward pressure on outreach lab rates that could induce some hospital systems to sell.

"There are a number of things that are getting the C suites of hospital systems that are involved in outreach to think about whether they really want to be in this business and would this be a good time to monetize," he said. "Therefore, I don't really see the pipeline of interest having been impacted over the last 12 months negatively."

It's unclear how robust that pipeline was even prior to the pandemic, though. While many observers expected implementation last year of the Protecting Access to Medicare Act (PAMA) to drive a spate of acquisitions in the industry, the effect has been relatively muted.

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PAMA and other market pressures continue to cut into the favorable pricing hospital outreach labs receive compared to large commercial labs like Quest, but these hospital facilities still typically receive a premium rate. This disconnect between outreach and large commercial lab rates can make acquisitions more challenging, Jeff Myers, vice president of consulting services at healthcare consulting firm Accumen, explained in a 2019 interview with 360Dx.

An outreach lab "might be worth $10 million to the hospital in terms of revenue, but it might be worth only $8 million in revenue to a national lab," he said. "And any kind of acquisition price would be based off that $8 million."

Nonetheless, Rusckowski said that he believed acquisition opportunities would be available post-pandemic.

"We believe that hospitals will be now increasingly looking at their options to become more efficient given the pressure the pandemic has put on many of them," he said. "And we're encouraged by the level of discussions we've had."

Quest completed lab service deals in Q4 with New York's Montefiore Nyack Hospital and Goshen Hospital in Indiana and Nutley, New Jersey-based Hackensack Meridian Health.